The ECB Pulls The Dust Covers Off Of Interest Rates

Front and center this morning we have a currency and metals rally to beat the band! And, it all began with yesterday’s announcement that the European Central Bank (ECB) did indeed hike rates… But that’s not all, kids! Check this out!

The ECB did indeed hike their internal interest rate yesterday, as they laid out in their previous press conference after last month’s meeting. This was the first major country to hike rates, and it was the first rate hike from the ECB in two years! The dust covers on Eurozone interest rates had to be pulled back! It’s about time! If you can’t spur an economy with low interest rates in two years, then for-get-a-bout-it! The real key I think, and the reason the euro (EUR) never really sold off yesterday, was the fact that in the press conference following the rate announcement, ECB President, Trichet gave a very balanced statement… He said that no decision had yet been made on whether this was the first of a series of rate hikes, which on first blush, would make you believe it was a “one and done” … But then he would emphasize that there were “upside risks to price stability” and that: 1. The ECB’s mandate was to provide price stability, and 2. That the ECB would not tolerate any second round effects… That leads me to believe that he left the door open for follow up rate hikes…

While I don’t think the ECB will go back-to-back with rate hikes, I do believe that by the end of 2011, we’ll see Eurozone internal rates at 1.75% (currently 1.25%)… Remember, price stability is job number 1 at the ECB… So, as we go along this summer, let’s watch for signs of continued inflation pressures in the Eurozone… When we spot them, we’ll know that the ECB has seen them too, for they aren’t as blind as a bat, like another central bank that I won’t name….

Speaking of signs… Yesterday, German Industrial Production surged higher in February, as I suspected it would after Tuesday’s surging Factory Orders report. German IP surged to 1.6% in February. The consensus forecast was for a rise of 0.5%, so once again the “experts” were flat out wrong! And then this morning… A report showed German exports rising the most in five months! So… Look at this report like this… Manufacturing is kicking tail and taking names, and exporters aren’t having a difficult time with the stronger euro… So, in my mind, with exports surging, the ECB is on tap to hike rates in June… But again, this could be old news by then, so we’ll just have to keep a scorecard and keep score at home.

So… Just like I said I thought an ECB rate hike would do, it has done… And that is, given credence to the higher yielding currencies that have already hiked rates, with some even doing so multiple times to really put 100 miles of desert between their rates and those in the US and Japan… For instance, the Aussie dollar (AUD) this morning is trading above $1.05! WOW! And the Brazilian real (BRL), you know, the currency for which the government keeps trying to stem appreciation? Well… The real is 1.5860 this morning, which is almost 2% stronger since yesterday morning, after the latest government attempt to squash the real’s gains…

The South African rand (ZAR), another higher yielding currency, is also on the roster of currencies kicking sand in the dollar’s face this morning. Another higher yielding currency, the Mexican peso (MXN) has joined in on the kicking too! You can’t say I didn’t alert you to this rally in the high yielders if the ECB hiked rates… I think I talked more than five times in the past week about it! So, for those of you who do not read every day… You would have had to miss a week, to not have heard that a rate hike by the ECB would shine the light on the “already higher yielding currencies”… Yes, a return to interest rate differentials is going the extra mile when valuing a currency!

OK… I also said above that the metals were also rallying… And that’s a fact, Jack! Gold has reached a new all-time high of $1,470 overnight, and silver has reached $40! WOW! Remember, earlier in the week, I told you that my new thought was about how the metals would not sell off with higher interest rates, but instead rally, for the markets would see higher rates as a sign that global growth could slow down… and voilà!

Now… Before you go out and buy a yacht, because your metals holdings are making you rich, you might want to sit down and see what my friend, and colleague at the Sovereign Society, Sean Hyman, has to say… Sean sent me a note yesterday telling me that, while the underlying trend for silver would remain prevalent, the short-term trading value of the metal could be in for some trouble… Now… Before we go any further… Sean is a technical trader extraordinaire. So… He uses technical phrases, but I think you’ll get the gist of what he’s saying here…

Silver has gone parabolic and could have a very severe correction before resuming its very long-term uptrend. Gold may do the same…but it’s not nearly as extended as silver. 45-degree angles are trending moves that are sustainable. Those are healthy trends. These have turned into parabolic moves lately and are beginning to be unhealthy trends.

Over the long haul, both gold and silver should be just fine…but there still could be a huge shake-out coming of the “weaker hands” that think that silver and gold are “one way bets” right now.

Sean is a great person, folks… Smarter than a propeller head, and I know he doesn’t want to spoil the party, but at least he said that the underlying trend would remain, which means, once the “shake-out” ends, silver could be back on the rally tracks… And for those of you who missed the “Silver Line bus” 5 months ago, when I was interviewed by NewsMax, and said that silver could go to $50 (when at that time it was $25), you’ll have your chance to catch the bus again…

Now… Where else could you get all this information in one place… and for free? I alert you to a rate hike, and what it could do to high yielders… I tell you about the ECB rate hike, and what it would do to high yielders and metals, and then alert you to the possibility that we could see a pull back in metals…

OK… Back to the reporting… The dollar appears to be doing the rope-a-dope again, pinned against the ropes, and getting beaten with jabs and strong blows… Long-time readers will recognize this, and think, “Hey, usually when the dollar begins doing the rope-a-dope, something happens that brings investors back to dollars, and halts the dollar selling.”… No wait, that’s what I was going to say! HA! But seriously… That’s exactly what happens… So, look for signs, signs… Could be the media jumping on the Eurozone peripheral countries again… Could be another financial meltdown… And then… Maybe, just maybe, this is the beginning of the ride on the slippery slope for the dollar that leads to what the government has been building to for years now… A cheaper/very weak dollar that can be used to pay foreigners for our debt servicing…

For instance, today, we have no data in the US data cupboard, but we have two Fed Heads speaking… One, a hawk (Fisher), the other a dove (Lockhart)… Both of whom are “non-voting”… But the markets will listen to whoever speaks the loudest about their opinion… If it’s Fisher, then we’ll hear of ending QE2 early… If it’s Lockhart, then we’ll hear of keeping things steady Eddie, due to problems with unemployment and housing…

While I’m not a fan or even have one iota of positive sentiment for quantitative easing… I do agree with the thought that the problems with unemployment, while getting a bit better, and Housing are too much of a load for the economy…

Oh… And before I go to the Big Finish… The price of oil made a HUGE jump yesterday and overnight and is now $111… Yes, that’s right $111… Can you say $5 gas? It’s coming, folks… Global growth is pushing the price of oil higher and higher, as countries around the world ramp up their demand for oil… Oh sure, I know there will be a few readers out there who will take issue with that statement, and say that “speculators” are driving the price of oil higher… Well, in my opinion, there could be some of that, but for the most part, I believe that global growth demand is the driver here…

Then there was this… Well, folks… Today, April 8, 2011, is the day the government. shuts down if no agreement can be reached… So.. If at midnight tonight, there’s been no agreement on budget cuts, so that the deficit limit can be raised, the government runs out of money to operate… Of course, we all know that the government doesn’t really have any money, unless they steal it from us… Ahem, Chuck, you’re supposed be on good behavior these days… OK, sorry, they don’t have money unless they tax us 50% of our earnings!

To recap… The ECB did hike rates yesterday, and ECB President, Trichet, left the door open for more rate hikes, so much so that Chuck now believes that Eurozone rates will be 1.75% by year-end. The rate hike shined the light on the currencies that had already hiked rates, like Aussie dollars, which traded to a new all-time high, and the metals with gold trading to another new all-time high, and silver rising to $40! Tonight at midnight, the government will shutdown if no agreement has been reached…

About Chuck Butler:

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.